Mish's Global Economic Trend Analysis

Bottom in for Detroit?
Pension Battle Shifts to San Jose, San Bernardino, Stockton; Rights of Dinosaurs vs. "Right Thing"
Lesson for Union Dinosaurs: Detroit Bankruptcy Judge Rules Public Pensions Haircuts OK; Unions Whine City Got "Absolutely Everything"
What Will Your Bank Look Like 5 Years From Now? How Will Pizzas Be Delivered? Do You Tip a Drone?

Posted: 03 Dec 2013 08:02 PM PST

I mentioned to my wife Liz tonight, that I thought "the bottom was in for Detroit". She asked "why?"

Here's my lengthy answer.

Unlike Vallejo, California, it is highly likely Detroit will actually shed pension obligations in the first go-around.

A mere 25% of students graduate from high school. Can Detroit schools get any worse?

In 2010 I wrote about Mayor Bing's plan to Cede 20% of the City to gangs

Detroit has been bankrupt for years. It simply refuses to admit it. Detroit's schools are bankrupt as well. A mere 25% of students graduate from high school.

Yet, in spite of hints and threats from mayors and budget commissions, and in spite of common sense talk of bankruptcy, Detroit has not pulled the bankruptcy trigger.

In a futile attempt to stave off the inevitable one last time, Mayor Bing's latest plan is to cutoff city services including road repairs, police patrols, street lights, and garbage collection in 20% of Detroit.

Would you want to live in one of the gang war-zones that his plan would create? Would you want to live in a bordering neighborhood or in a bordering city?

Regardless of your answer, Bing's plan cannot and will not work and I believe Detroit will, sometime in 2011, file for bankruptcy.

Here we are today. The city finally pulled the bankruptcy trigger, but it took two more wasted years.

Here's a picture of Detroit's Michigan Central Train Depot.

Image courtesy of the Journal and the AP.

Also in 2010, Business Insider posted a fantastic set of images of the beautiful 3.5 million square foot Packard property worth $13 million (but no taxes collected for years). Here are a couple of those images.

Bottom Catalyst

Still, things do not bottom until there is a catalyst.

Today we had that catalyst. It came in the form of a Lesson for Union Dinosaurs: Detroit Bankruptcy Judge Rules Public Pensions Haircuts OK.

After discussing the above, I happened to read some comments from the New York Times article Detroit Ruling on Bankruptcy Lifts Pension Protections.

The article itself did not say much more than I said on my blog earlier. But check out this comment by Kathleen Kelly ...

I was born in and grew up in Detroit. My parents moved to Detroit from another country with their three other children, prior to my birth. The city was, at that time, a gleaming jewel, and a global center of manufacturing.

Yes, the city has taken a turn downward for the past several decades. It's been sad, painful, and sobering to watch. The key question is "what now?".

A lot of turnover has occurred on City Council in the past year. The city also has a new mayor and a new police chief. Young artisans, craftsmen and business people are moving into the city, specifically into downtown and midtown, to take full advantage of affordable rents. Business owners like Dan Gilbert are funding revitalization efforts in terms of rehabbing or demolishing empty buildings.

Areas of NYC have been renowned, over my lifetime, for re-gentrification. Detroit may learn something from that. Yes, the tune was called & played, and now the piper must be paid. But for those of us who've stayed close and who love the city, we see a blank slate now, replete with new possibilities. And yes, it won't be like "it was" with auto plants dotting the city landscape. But that doesn't mean it still can't or won't be great in its own way.

Finger-pointing won't help, and I'd have thought we'd moved beyond that. Safe, affordable housing, stable infrastructure, education and jobs. That's where our focus needs to be, and that's what will make Detroit great again.

I was in Ann Arbor, Michigan over Thanksgiving with Liz's family. Jan, a niece of Liz who runs a property management company in Detroit made similar comments about revitalization of Detroit by young artists.

Fresh-Start Proposal

Let's hope Detroit makes the most of this bankruptcy opportunity. But it can only do so if it sheds a huge chunk of pension and bond obligations.

Here is my six point fresh-start proposal.

An agreement to end collective bargaining for all city workers
An end to defined benefit pension plans for new workers and also for workers with less than 10 years of service
A sustainable benefit model for existing workers with over 10 years of service, with pension plan assumptions equal to the long-term treasury rate
Automatic provisions for further pension cuts if plan assumptions were not met
An end to the right to strike for public safety workers
An end to all prevailing wage laws

It may take years, if ever, for Detroit to be "great" again. But for the first time in decades, Detroit actually has a chance.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Pension Battle Shifts to San Jose, San Bernardino, Stockton; Rights of Dinosaurs vs. "Right Thing"

Posted: 03 Dec 2013 01:28 PM PST

Now that a federal judge properly ruled pension obligations are not sacrosanct (see Lesson for Union Dinosaurs) the spotlight is once again on union dinosaurs in California.

Bankrupt San Bernardino foolishly did not attempt to shed pension obligations in bankruptcy, but perhaps it can now reconsider.

What about Stockton and Vallejo?

On April 1, 2013 Judge Rules Stockton CA Bankruptcy is Valid, City Acted in Good Faith. Hopefully Stockton will follow inevitable pension cuts in Detroit.

Second Chance for Vallejo

Vallejo had a golden opportunity to shed pension obligations in its first bankruptcy. When the city failed to do so, I made an easy prediction: Within years, Vallejo would be back in bankruptcy court.

That prediction appears well-founded. On October 20, 2013 I penned Vallejo, Mired in Pension Debt Again; Lesson for Stockton and Detroit - Shed Those Pension Obligations Now!

My comment from above: "Stockton and Detroit have a choice. They can cut pensions now, or cut them later in a second bankruptcy, just like Vallejo will."

Will Stockton get it right? Hopefully, but some things will depend on Detroit. We have not yet seen the final ruling, but steep haircuts on pension promises and unsecured general bonds should be forthcoming.

Battle in San Jose

The battle in San Jose, population 983,000 and California's third-largest city, is of a similar nature.

San Jose spends 33% of its general fund revenue on pensions, the highest among the 25 most populous U.S. cities.

Mayor Chuck Reed wants to make changes to the pension plan. Specifically, Reed, a 65-year-old Democrat, is leading a statewide voter initiative to allow changes in future benefits for existing employees.

Union Dinosaurs Part II

Of course union dinosaurs are fighting the initiative, which means unions would rather see San Jose go bankrupt than negotiate.

Bloomberg reports San Jose Pension Crush Spurs Bid to Ease California Pacts.

San Jose, a city of 983,000 that is California's third-largest, has been forced to make deep cuts in basic services as its retirement costs soared to $245 million in 2012 from $73 million in 2002. The city's pension and retiree health-care liability is almost $3 billion, according to Reed, who was first elected in 2006.

San Jose voters last year approved retirement changes requiring new employees to pay 50 percent of the plan's total cost, or about twice as much as current employees. Workers already on the city's payroll could keep their existing plans by increasing their contributions or keep their costs steady by choosing a plan with more modest benefits.

Unions including the San Jose Police Officers' Association and the San Jose Retired Employees Association sued to block the change. The case is pending.

Reed's ballot initiative would amend the California constitution to give local governments the power to negotiate changes to existing employees' future pension or retiree health care, while protecting benefits they've already earned.

"What they're trying to do is overturn decades of case law, Supreme Court decisions and change the California constitution to allow public employers to either change, cut or eliminate public employees' pensions in the middle of their career," said Dave Low, executive director of the California School Employees Association and chairman of Californians for Retirement Security, a coalition of public employees and retirees.

"It's a vested right," Low said.

"In talking with other mayors around the state, everybody would benefit from having clear authority to be able to negotiate changes for future benefits for work yet to be performed for current employees," Reed said of his ballot measure.

Mayors Pat Morris of bankrupt San Bernardino, Tom Tait of Anaheim and Bill Kampe of Pacific Grove are backing the plan. Santa Ana Mayor Miguel Pulido dropped out as a formal supporter and was replaced by Vallejo Vice Mayor Stephanie Gomes. Opponents include Oakland Mayor Jean Quan and San Francisco Board of Supervisors President David Chiu.

Also assailing the plan are the California Public Employees' Retirement System, the largest U.S. public pension, and the California State Teachers' Retirement System, the second-biggest U.S. public pension contending with a $70 billion unfunded liability.

The proposal "threatens the retirement security of existing and future educators, who have provided many years of service to California's students," Jack Ehnes, the teacher pension's chief executive officer, said in a statement.

Reed said cities can continue to cut services and raise taxes, make employees pay more, cut benefit payments to retirees or cut benefits for current employees.

"None of those is fair, so it is better to talk about changing expectations of future accruals for future work," Reed said.

CalPERS, Oakland Mayor Against Reed's Plan

It's not yet official, but Oakland is as bankrupt as bankrupt can be. Why its mayor would not want to back Reed's initiative has three possibilities: reelection motives, sheer stupidity, or to preserve her own ill-gotten pension.

Rights of Dinosaurs vs. "Right Thing"

Dave Low, executive director of the California School Employees Association and chairman of Californians for Retirement Security, a coalition of public employees and retirees, whines "It's a vested right".

Low can whine all he wants, but bankruptcy is a "right" as well. And rights in bankruptcy overrule alleged rights of unions.

Speaking of which, those alleged rights were primarily obtained via a process of coercion, threats, bribery, and back-room deals with crooked politicians willing to give unions what unions want so the politicians can get elected.

What's "right" about that?

From a taxpayer perspective, the "right thing" to do is end collective bargaining of all public unions, after-which public unions, like dinosaurs, will become rightfully extinct.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Lesson for Union Dinosaurs: Detroit Bankruptcy Judge Rules Public Pensions Haircuts OK; Unions Whine City Got "Absolutely Everything"

Posted: 03 Dec 2013 10:21 AM PST

At long last, beleaguered taxpayers will not have to put up with nonsense from public unions about the sanctity of pensions.

In spite of Michigan constitutional provisions, the federal judge presiding over the Detroit bankruptcy filing ruled the city filed in good faith. More importantly, the judge ruled the provision in the Michigan Constitution protecting public pensions isn't a bulletproof shield in a bankruptcy.

Yahoo!Finance reports Judge says Detroit Eligible for Bankruptcy

Detroit is eligible to shed billions in debt in the largest public bankruptcy in U.S. history, a judge said Tuesday in a long-awaited decision that now shifts the case toward how the city will accomplish that task.

Judge Steven Rhodes turned down objections from unions, pension funds and retirees, which, like other creditors, could lose under any plan to solve $18 billion in long-term liabilities.

"This once proud and prosperous city can't pay its debts. It's insolvent. It's eligible for bankruptcy," Rhodes said in announcing his decision. "At the same time, it also has an opportunity for a fresh start."

Rhodes' decision is a critical milestone. He said pensions, like any contract, can be cut, adding that a provision in the Michigan Constitution protecting public pensions isn't a bulletproof shield in a bankruptcy.

The city says pension funds are short by $3.5 billion. Anxious retirees drawing less than $20,000 a year have appeared in court and put an anguished face on the case. Despite his finding, Rhodes cautioned everyone that he won't automatically approve pension cuts that could be part of Detroit's eventual plan to get out of bankruptcy.

Emergency manager Kevyn Orr, who had testified the city's current conditions are "unacceptable," release a statement praising the judge's ruling and pledging to "press ahead with the ongoing revitalization of Detroit."

Behind closed doors, mediators, led by another judge, have been meeting with Orr's team and creditors for weeks to explore possible settlements.

Huge "Fresh Start" Win for Detroit

This was a huge, fresh-start win for the city of Detroit and its residents. The unions disagree.

Minutes after the ruling, a lawyer for the city's largest union, said she would pursue an appeal at the 6th U.S. Circuit Court of Appeals in Cincinnati. City officials got "absolutely everything" in Rhodes' decision, she told reporters.

"It's a huge loss for the city of Detroit," said Sharon Levine, an attorney for the American Federation of State, County and Municipal Employees, which represents half the city's workers.

Opponents want to go directly to a federal appeals court in Cincinnati, bypassing the usual procedure of having a U.S. District Court judge hear the case.

Definition of "Absolutely Everything"

Levine whines, city officials got "absolutely everything". No, not yet, but taxpayers can hope.

I propose the final settlement should include ...

An agreement to end collective bargaining for all city workers
An end to defined benefit pension plans for new workers and also for workers with less than 10 years of service
A sustainable benefit model for existing workers with over 10 years of service, with pension plan assumptions equal to the long-term treasury rate
Automatic provisions for further pension cuts if plan assumptions were not met
An end to the right to strike for public safety workers
An end to all prevailing wage laws

That would be "nearly everything", and it would provide the fresh start that Detroit desperately needs.

Lesson for Union Dinosaurs

Something along those lines would also send a signal to unions everywhere that they can and should expect the same treatment in bankruptcy court.

Hopefully this would get unions to the bargaining table before bankruptcy, but don't count on dinosaurs to learn much from history.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

What Will Your Bank Look Like 5 Years From Now? How Will Pizzas Be Delivered? Do You Tip a Drone?

Posted: 03 Dec 2013 12:58 AM PST

Every time I walk into my bank, I typically notice several offices in plain view of customers, each with a manager or loan office sitting doing nothing.

On other occasions, there may be a wait to see an officer, perhaps even a long wait.

What if there were queues of bankers at all times, and a no-wait policy? What might that cost?

Actually, it would be far cheaper.

Express Banking

The Telegraph reports computers lined up to replace humans in bank branches.

Several major banks are understood to be in talks to introduce "express" branches, which would be similar to self-service checkouts in supermarkets. These smaller outlets would be almost completely devoid of human interaction.

If trials are successful, the new format is likely to be adopted across Britain, sources said, with larger branches slimmed down and staff numbers reduced in branches.

Martin Shires of banking technology firm NCR said: "As early as next year, you could see one of the major high street banks buying a convenience store location and fitting it out with ATMs that mean you can do 95pc of your transactions through self-service. Within five years this will be a common sight."

The new branches would be smaller and fitted with screens and telephones so that customers could call a specialist department for assistance. This might include a video link similar to the Skype internet telephone service.

Ed Salvesen, a researcher at Brewin Dolphin, the investment manager, said while it is likely that some staff will retained in branches, in-person banking could become a rarity. "Face-to-face communication is slowly being faded out," he said.

Mr Shires said the technology would allow banks to open for longer, as machine-led branches would be significantly cheaper to run. He said a pilot scheme of express branches in the US had reduced operating costs by up to 50pc, with some staff redeployed from branches to video call centres.

Drone for Deliveries

Amazon made a big splash last week with news of using drones for deliveries.

Amazon, the world's largest online retailer, is testing unmanned drones to deliver goods to customers, Chief Executive Jeff Bezos says. The drones, called Octocopters, could deliver packages weighing up to 2.3kg to customers within 30 minutes of them placing the order, he said.

However, he added that it could take up to five years for the service to start. The US Federal Aviation Administration is yet to approve the use of unmanned drones for civilian purposes. "I know this looks like science fiction, but it's not," Mr Bezos told CBS television's 60 Minutes programme.

Amazon Prime Air

On it's website, Amazon is excited about Prime Air.

The goal of this new delivery system is to get packages into customers' hands in 30 minutes or less using unmanned aerial vehicles.

Putting Prime Air into commercial use will take some number of years as we advance the technology and wait for the necessary FAA rules and regulations.

Amazon Test Flight

Do You Tip a Drone?

Dominos does not deliver to my area. Nor Does Pizza hut. Yet, I am less distance away from their stores than many places they will deliver to. I am just in a different town. A drone with a GPS would have no problems whatsoever delivering to my address.

And it would be cheaper and faster, for me, as well as the pizza place to not have to bother with human carriers or tips.

Like Amazon, Domino's Tests Delivery of Pizza by Remote-Controlled Drone.

The company's DomiCopter—a joint effort by U.K. drone specialist AeroSight, Big Communications and creative agency T + Biscuits—is an eco-friendly machine capable of carrying pizzas in heatwave bags for impressive distances without refueling. Sadly, it's also a threat to the labor force of guys who get stoned in their cars and forget where you live.

Jamba Juice Vending Machines

Bloomberg reports As Smoothie Store Sales Slow, Jamba Juice Turns to Machines

McDonald's (MCD) is in the smoothie market, and others like Dairy Queen and Panera (PNRA) spent the summer promoting their rival drinks.

But the smoothie chain is hoping to see improvement from something it calls "JambaGo," a self-serve machine that can be installed in cafeterias, schools, and convenience stores. Jamba Juice makes money by selling the prepackaged, pre-blended smoothie ingredients to JambaGo vendors, like a soda maker selling syrup to the owner of a soda fountain. The advantages: Jamba doesn't need to build a store and the labor costs are much lower compared with hiring staff to concoct made-to-order drinks.

About that $15 an Hour Minimum Wage

I received hundreds of emails and comments to my post Battle for $15 minimum Wage; Should Companies Pay Workers More? Wal-Mart a Savior or a Pariah?

But as I reflect on what is on the horizon at Amazon, at Dominos, at banks, and with Jamba Juice Vending machines, it seems the $7.25 an hour minimum wage is far too high already.

Regardless, every increase in minimum wage will further encourage businesses to seek alternatives to human employment.

Obamacare does the same thing.

More Questions to Consider

Does Jamba Juice even need stores?
Why can't McDonald's drive-up windows have a central dispatch (in India)?
What about touch screen fast-food service robots? Might they not even take on a human form?

I can certainly envision McDonald's paying $15 an hour, but with 75% fewer human employees. The same applies to every fast-food company in the world.

You can force fast food and other places to pay a higher minimum wage, but you cannot force them to hire someone.

And the higher the minimum wage, and the higher the costs of Obamacare, the greater incentive to seek alternatives.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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3.12.13

Mish's Global Economic Trend Analysis

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